BRENTWOOD, Tenn., June 24, 2013 /PRNewswire/ -- On Friday the Securities and Exchange Commission (SEC) charged China-based China MediaExpress and its CEO Zheng Cheng with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.
China MediaExpress, a company that operates a television advertising network on inter-city and airport express buses in China, materially overstated its cash balances by more than 40,000% according to the SEC complaint.
As highlighted in the SEC's complaint, "China Media's falsely reported increases in its cash balances allowed the Company to attract investors and raise money from stock sales." As an example, in 2010, "a hedge fund paid China Media $53 million to purchase millions of shares of China Media's preferred and common stock."
China Media had gained access to U.S. investors through the reverse-merger process and had a market capitalization of more than $700 million before the fraud was uncovered. Public investors suffered major losses when the stock tumbled more than 90% in the weeks after the first fraud allegations. The stock has since been delisted from the U.S. stock exchange.
"Fraudsters get value by stealing cash and other assets from a business, the stock they own goes up in value as the company's stock price climbs, or they receive bonuses and stock options for financial performance," said Chris Schellhorn, CEO of Confirmation.com. In this case, in addition to seeing his net worth increase as the company's stock skyrocketed, the SEC says that Cheng also manipulated the financial statements to earn stock bonuses "worth approximately $6 million."
In March 2011, China Media's external auditor resigned citing suspicions concerning fraudulent bank confirmations and statements, and falsified confirmations of accounts receivables and payables. The company's audit committee then hired a law firm and a second outside audit firm to investigate.
"Because one of the banks in this case had switched to responding to audit confirmations exclusively through Confirmation.com and no longer accepted mailed or faxed forms, the CEO could not misdirect the auditor's confirmations," said Dave Malone, vice president at Confirmation.com.
According to the SEC's complaint, right before the fraud became public knowledge, Cheng offered a senior accountant working on the investigation a bribe of approximately $1.5 million to "assist with the investigation."
"This is another example of a fraudster trying to hide their fraud by refusing to allow the use of Confirmation.com's service," said Brian Fox, founder and chief marketing officer of Confirmation.com. "Just like the frauds at PFG Best and the Shepherd Major Play Option Fund, which our service helped uncover, refusing to allow the auditors to confirm balances through Confirmation.com is always a red flag for fraud."
Confirmation.com is the creator and world's leading provider of secure electronic audit confirmation services. It holds 6 U.S. patents and processes over $1 trillion in confirmation information annually for a majority of public companies, as well as private companies, non-profits and government agencies. In addition to its bank confirmation solution, the company provides solutions for more than 40 different types of audit confirmations including accounts receivable confirmations. Confirmation.com is the Preferred Provider of Electronic Confirmations for the AICPA Trusted Business Advisor™ Solutions Program and is endorsed by the American Bankers Association. Confirmation.com has also received numerous awards including being a multi-year alumnus on the Inc. 500 list for 2010 and 2011. Several hundred In-Network responding companies including all of the Top 10 banks in the U.S. and over 11,000 accounting firms in more than 100 countries trust Confirmation.com for their audit confirmation needs. For more information, visit Confirmation.com.
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